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Making A Family Business Stronger

To some people the term “family business” will awaken connotations of poorly managed, nepotistic organisations that lack the corporate professionalism of public companies held accountable to shareholders.

In our experience this is an incorrect stereotype of the entities which account for 70% of the total number in Australia with an estimated $4.3 trillion of wealth. Family businesses drive the Australian economy, innovation and employment, and their resiliency serves as a buffer against economic shocks.

Family businesses have an extraordinary ability to adapt quickly to change in their operating environment. Their owners believe that a competitive advantage comes from preserving the family culture which personalises customer and supplier relationships. Furthermore, in contrast to many public companies whose decision making horizon moves from one reporting period to another, we see most family businesses with much longer term views, often spanning more than one generation. This makes them highly resilient, being more prepared to accept periods of low returns in order to execute strategies which align both financial and non-financial objectives.

However, despite all these strengths, family companies can be far more complex than other types, as personal and work lives interact within the organisation. There are some genuine pitfalls, which can seriously impact success if not appropriately handled, most importantly; governance and transition planning.

In 2011 a survey by KPMG found that more than half of family firms had no board or governing body. Most did not have a formal process for communicating with family members about business matters. While informal governance may be adequate for younger smaller organisations, there are some advantages of introducing formal procedures as a company grows. An external consultative board can bring a wealth of knowledge and a different perspective to the family business. Governance structures can help ensure that issues are dealt with in a professional manner and that family matters do not interfere with the operation of the company.

When it comes to exit strategies, 81% of owners intend to retire in the next ten years, however only 20% have a succession plan. Unplanned transitions can be tumultuous and may result in missed opportunities, such as not fully maximising the value of the business prior to sale.

The choice of succession or sale is one best made well ahead of time and will need to be carefully considered in light of the owners’ circumstances, for example whether they have a need to unlock the value in the business to fund retirement, whether they want to stay involved in some capacity, and whether there is a ready, willing and capable successor within the family. Successors may also be found from outside the family, which may provide the owner with an opportunity to remain influential in the business as a board member without having to run the day to day operations. The better prepared the succession plan, the more likely the value of the business will be optimised.

Family business owners are typically passionate, forward thinking and innovative and businesses that reflect their values are inevitably successful. The common pitfalls of family businesses can be easily avoided with sound planning and the use of outside expertise if required.